Question 1

Australia is a major producer of agricultural and dairy products and exports coffee,tea,spices,and milk products to the United States.The United States is the world's third largest supplier of machinery and exports heavy machinery to Australia.What explains the trade equation between Australia and the United States?

Accepted Answer

The trade equation between Australia and the United States is explained by comparative advantage. Both countries specialize in producing certain goods and trade them for goods produced by the other country. Australia is a major producer of agricultural and dairy products, while the United States exports heavy machinery.

Question 2

Which of the following statements best indicates Samuelson's criticism of free trade?

Accepted Answer

Samuelson's criticism of free trade is that even if a rich country imports cheaper goods from a poor country, it may not be able to produce a net gain if the dynamic effect of free trade is to lower the real wage rates in the rich country. This is often referred to as the "Matthew effect" - the idea that the rich get richer while the poor get poorer.

Question 3

In Malopia,it takes 10 units of resources to increase its output of cocoa from 12 tons to 13 tons,but 11 units of resources to increase output from 13 tons to 14 tons,and 12 units of resources to increase output from 14 tons and 15 tons,and so on.Malopia's problem is an example of

Accepted Answer

Malopia's problem is an example of diminishing returns to specialization. This means that as more resources are applied to the production of cocoa, the marginal increase in output decreases, indicating a point of diminishing returns. This is illustrated by the fact that it takes more units of resources to increase output from 13 tons to 14 tons than it did to increase output from 12 tons to 13 tons. This concept is a fundamental principle in economics and is often observed in real-world production processes.

Question 4

One of the criticisms against Sisira is that it deliberately keeps its currency value low against the U.S.and other developed nations,and thus amasses a trade surplus and foreign exchange reserves.According to this criticism,Sisira is acting as a

Accepted Answer

Sisira's deliberate policy of keeping its currency value low against the U.S. and other developed nations in order to amass a trade surplus and foreign exchange reserves is characteristic of neo-mercantilism. This approach focuses on maximizing a country's exports and minimizing its imports in order to achieve economic growth and development, often at the expense of other countries.

Question 5

Consider two countries Daria and Atlantis.Daria is a major producer of wheat and rice while Atlantis specializes in the production of fertilizers and manufacturing equipment.Engaging in free trade benefits both countries since Daria is an agrarian nation and Atlantis lacks arable land.This follows the theory of comparative advantage,and we can say that engaging in free trade benefits all countries that participate in it.Which of the following is an inaccurate assumption on which this conclusion is based?

Accepted Answer

We have assumed a simple world in which there are only two countries.

Question 6

Which of the following suggests that trade is a positive-sum game in which all participating countries fetch economic gains?

Accepted Answer

Comparative advantage is the economic principle that suggests that even countries with an absolute disadvantage in producing certain goods can still benefit from trade by specializing in the production of goods they can produce relatively more efficiently. This principle shows that trade creates gains for all participating countries, thereby making it a positive-sum game.

Question 7

Argonia and Selenia have specialized in the production of industrial equipment and pharmaceuticals respectively.Argonia exports industrial equipment to Selenia,which in turn exports chemicals and medicines to Argonia.According to the theory of comparative advantage,this mutually beneficial trade relationship best illustrates

Accepted Answer

The scenario described is an example of a positive-sum game, as both Argonia and Selenia are able to benefit from the trade relationship due to their comparative advantages in different industries. This highlights the advantages of free trade and specialization, which can lead to increased economic growth and prosperity for all parties involved. The other options listed are not applicable as they do not accurately describe the scenario presented.

Question 8

Palladia specializes in the production of beef and produces beef more efficiently than any other country.It buys wheat,which it produces less efficiently than beef,from Rhodia,even though it produces wheat more efficiently than Rhodia.Which of the following theories of international trade supports Palladia's decision to buy wheat from Rhodia?

Accepted Answer

Palladia's decision to buy wheat from Rhodia is based on Ricardo's theory of comparative advantage. According to this theory, countries should specialize in producing goods and services that they can produce most efficiently and then trade with other countries for goods and services that they cannot produce efficiently. Palladia is specializing in producing beef because it can produce it more efficiently than any other country. It is buying wheat from Rhodia because even though it can produce wheat more efficiently than Rhodia, it is still less efficient than producing beef. By trading with Rhodia, Palladia is able to maximize its overall production and efficiency.

Question 9

In Zombia,it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1 ton of rice.In South Curmudgea,it takes 40 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice.Zombia has a comparative advantage over South Curmedgea in

Accepted Answer

Zombia has a lower resource requirement for cocoa production compared to South Curmudgea, indicating that Zombia has a comparative advantage in cocoa production. However, this does not necessarily translate to a comparative advantage in rice production. Therefore, the answer is B which signifies that Zombia has a comparative advantage in cocoa production.

Question 10

India is the largest exporter of information technology services to the U.S.In turn,the U.S.exported $3 billion worth of aircraft to India.Which of the following is illustrated by this form of trade between India and the U.S.?

Accepted Answer

The answer of India is the largest exporter of information...

Question 11

While the country of New Zafariland specializes in dairy products,its geographical neighbor,Zwansea specializes in heavy machinery.New Zafariland exports dairy to Zwansea,which in turn exports heavy machinery to New Zafariland.According to the theory of comparative advantage,this mutually beneficial trade relationship best illustrates

Accepted Answer

This trade relationship between New Zafariland and Zwansea demonstrates the principle of comparative advantage where each country specializes in the production of goods they can produce efficiently and trade with each other. It is a positive-sum game because both countries benefit from the trade. There is no reference to trade barriers, first-mover advantage, mercantilism or zero-sum game in the scenario.

Question 12

Neo-mercantilists equate political power with economic power and economic power with

Accepted Answer

Neo-mercantilists believe that a country's economic power is directly linked to its ability to maintain a balance-of-trade surplus, which they view as a sign of strength and dominance in the global economy. They also see political power as a means to achieving and maintaining this economic power. Therefore, choice B (a balance-of-trade surplus) is the most accurate answer.

Question 13

India specializes in business process outsourcing and does this more efficiently than any other country.It buys agricultural commodities,which it produces less efficiently than outsourcing activities,from the U.S.,even though it produces these agricultural commodities more efficiently than the U.S.Which of the following theories of international trade supports India's decision to buy agricultural commodities from the U.S.?

Accepted Answer

India's decision to buy agricultural commodities from the U.S. instead of producing them domestically is supported by Ricardo's theory of comparative advantage. According to the theory, countries should specialize in producing goods in which they have a comparative advantage (i.e., they can produce at a lower opportunity cost) and trade with other countries for goods that they produce less efficiently. In this case, India specializes in business process outsourcing, which it can produce more efficiently than agricultural commodities, while the U.S. has a comparative advantage in producing agricultural commodities. By trading, both countries can benefit from each other's specialization and increase their overall economic efficiency.

Question 14

In Zombia,it takes 10 resources to produce 1 ton of cocoa and 13.5 resources to produce 1 ton of rice.In South Curmudgea,it takes 40 resources to produce 1 ton of cocoa and 20 resources to produce 1 ton of rice.Zombia has a comparative advantage over South Curmedgea in cocoa.This follows the theory of comparative advantage,and we can say that engaging in free trade benefits all countries that participate in it.Which of the following is an inaccurate assumption on which this conclusion is based?

Accepted Answer

The answer of In Zombia,it takes 10 resources to produce...

Question 15

Which of the following is a reason for diminishing rather than constant returns to specialization?

Accepted Answer

Diminishing returns to specialization occur when there are different goods that use different resources in different proportions. As a country specializes in the production of a certain good, it may have to allocate increasingly scarce resources to produce additional units of that good, decreasing the resources available for the production of other goods. This results in diminishing returns to specialization.

Question 16

New Zealand is the largest exporter of dairy products to the United States.The United States is the world's third largest supplier of machinery and exports heavy machinery to New Zealand.What explains the trade equation between New Zealand and the United States?

Accepted Answer

The trade equation between New Zealand and the United States can be explained by their absolute advantages in producing certain goods. New Zealand has a comparative advantage in dairy production and exports dairy products to the United States. On the other hand, the United States has a comparative advantage in producing heavy machinery and exports it to New Zealand. This trade is mutually beneficial for both countries as it allows them to specialize in the production of goods they are most efficient at and trade for goods they cannot produce as efficiently. Tariff barriers and first-mover advantages do not play a significant role in explaining this trade equation. The statement about gold and silver is not relevant to this trade equation.

Question 17

Diminishing returns to specialization occur when

Accepted Answer

Diminishing returns to specialization occur when more units of resources are required to produce each additional unit. In other words, the marginal productivity of additional units of resources decreases as more are used, leading to a decrease in overall efficiency and productivity.

Question 18

One of the rebuttals to Samuelson's critique of the free trade model is that

Accepted Answer

The answer of One of the rebuttals to Samuelson's critique...

Question 19

Which of the following suggests that consumers in all nations can consume more if there are no restrictions on trade?

Accepted Answer

Ricardo's theory of comparative advantage suggests that if nations specialize in producing goods in which they have a comparative advantage and trade with each other, then all nations can consume more than they would be able to in a closed economy. This is because each nation can specialize in producing the good in which it has a comparative advantage and import the other goods at a lower cost than it would take to produce them domestically. Therefore, there are no restrictions on trade, and consumers in all nations can consume more.

Question 20

Cadmia and Rhodia specialize in the production of textiles and agricultural products respectively.They are the best at their respective specializations.Cadmia trades textiles with Rhodia in exchange for agricultural products.Which of the following is illustrated by this form of trade between Cadmia and Rhodia?

Accepted Answer

Cadmia and Rhodia each have an absolute advantage in their respective specializations, meaning they are the most efficient producers of those goods. The trade between them illustrates the concept of absolute advantage, where each country benefits by specializing in the production of goods where they have an efficiency advantage and trading for other goods.

Quiz 6: International Trade Theory